The Warren Buffett Way

3 ideas

1. Twelve tenets across four investment domains

   A stock is evaluated as a whole business by passing it through four filters: business tenets (simple, understandable, consistent operating history, favorable long-term prospects), management tenets (rational capital allocation, candor with shareholders, resistance to the institutional imperative), financial tenets (return on equity rather than earnings per share, owner earnings, high profit margins, each retained dollar creating at least a dollar of market value), and market tenets (intrinsic value, and purchase at a significant discount to it). A purchase is justified only when it passes all four domains, so the price paid becomes the last check rather than the first.

2. Owner earnings as true cash yield

   Owner earnings are net income plus depreciation, depletion and amortization, minus the capital expenditures and working capital the business needs to keep its competitive position and unit volume. Intrinsic value is then these owner earnings projected forward and discounted back to today.

3. Focus investing over broad diversification

   Pick a small number of businesses (roughly 10 to 15) most likely to deliver above-average long-term returns, put the largest amounts into the highest-probability ideas, and hold them through short-term price swings. Diversification is treated as protection against ignorance: concentrating in understood businesses lowers real risk, which is defined as the chance of permanent loss of capital rather than price volatility, while accepting higher interim volatility in exchange for superior long-run returns.

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